As U.S. healthcare reform approaches its implementation next
year, the key aspects of the Patient Protection and Affordable Care Act have
become well known to most employers, but there remain more than a few issues
that haven't received as much attention but still need to be addressed by HR
executives.

By Tracy Watts and Eric Grossman

Wednesday, March 6, 2013

As
U.S. health care reform approaches its implementation next year, the key
aspects of the Patient Protection and Affordable Care Act have become well
known to most employers, but there remain more than a few issues that HR
executives are grappling with. Here are five key considerations for employers
in this pre-implementation year:

1.
The Hourly Threshold

For
many companies, the question of providing health benefits versus managing hourly
workers to less than the 30-hours-per-week eligibility threshold is a key
issue, and in our discussions with employers it's evident that many of them
haven't solved it. Beginning in 2014, companies with 50 or more full-time
equivalent employees will face Shared Responsibility Penalties if they do not
offer a medical plan that meets minimum plan requirements and with affordable
contributions for all who work 30-plus hours per week.

More
than half (51 percent) of employers we surveyed (in Mercer's 2012 Survey of
Employer-Sponsored Health Plans) who don't currently offer coverage to
30-plus hour employees say they are likely to change their workforce strategy
so that fewer employees work 30-plus hours per week. Other options, such as
offering a lower-cost plan
for newly eligible hourly employees, were favored by only 27 percent, while
making all employees eligible for full-time employee plans was favored by 24
percent.

Regardless
of their strategy, employers will have to rigorously track their employees'
hours, relying on solid databases to document those hours. The data will be
critical to prove what they may or may not owe in Shared Responsibility penalties
based on IRS data calculations after the close of 2014. While 93 percent of the
companies we surveyed in 2012 remain committed to providing health insurance to
employees (for reasons that make competitive sense in terms not only of
attraction and retention but also in terms of engagement and productivity),
health-coverage decisions based on hours worked can have a significant financial
impact.

Consider,
for example, a company that currently offers coverage to workers scheduled for
more than 35 hours a week and employs 1,000 employees who work 30 to 34 hours a
week. We estimate that the cost of extending single coverage to those additional
workers can range from $6 million to $8 million. On the other hand, the cost of
reducing employee hours to below 30 to avoid ACA coverage requirements can be
even greater, as more employees will be required to meet work demands, while
the wage loss for the employees whose hours are reduced may take a heavy toll
on productivity and profitability.

2.The Dependent-Coverage
Dilemma

A
popular provision of the ACA with consumers was the expansion of
health-coverage eligibility to dependent children up to the age of 26. For
employers, this extension added, on average, 2 percent to their cost of
providing health coverage. Employers have responded by raising the employee
contribution requirements for health coverage that includes the spouse and/or
children.

The
affordability requirement of the ACA only applies to individual coverage. With
the cost to employees of adding dependents to their health plan increasing, over
time this may result in significant cost to cover dependents and may become
unaffordable for some. On the other hand, many employers want to be as
competitive as possible in offering dependent coverage.

At
present, this affordability issue represents something of a gap in the ACA, in
that employees with affordable coverage from their employer that meets all the
ACA requirements will preclude other family members from qualifying for
subsidized coverage on a public exchange. This gap may be addressed in future
changes to the law; in the meantime, employers can help their workers through
communication efforts that help clarify the options for spouse, dependent and
family coverage.

3.
Resetting Benefit Values

As
2014 approaches, benefit plan design remains a strategic question for many
employers. Each year since the law was signed into effect, employers have faced
compliance requirements that have added cost to the health benefits. The elimination
of benefit maximums and one hundred percent coverage for preventive care are
several examples. This will continue into 2014 when employers must provide
benefits to everyone working 30 or more hours per week, satisfy minimum plan
design requirements and affordable contributions or be subject to the Shared
Responsibility Surcharge. As employers quantify the impact of the law on their
overall health benefit costs, many have become motivated to embrace bold plan design
strategies.

In
our research and interviews with HR executives, we see a trend toward more
companies making consumer-directed health plans, or CDHPs, their default or
core plans, and better communicating the advantages of the CDHP option, from
which employees can buy "up" to higher benefit levels. As companies
figure out their optimal mix of part-time/full-time employees in order to
ensure productivity and balance the costs associated with the ACA, they can
also take advantage of plan design strategies that can reset benefit values
fairly and effectively.

4.
Driving Improved Health

Employers
have long been focused on improving the overall health of their workforce. Wellness
and health management programs are prevalent strategies as well as favoring
health plans with better coordinated-care management for high-cost patients. More
employers are now willing to reward health performance through outcomes-based
incentives such as offering lower premium contributions for non-tobacco users, or
rewarding employees for achieving or maintaining specific health status targets
such as BMI (body/mass index) or blood pressure.

While
it's challenging to show the savings from improved health, about two-fifths of
very large employers (more than 10,000 employees) in our 2012 survey say they
have formally measured the ROI of their health management programs. And the
results are strong: more than three-fourths say that these programs have
already had a positive impact on their medical cost trend. As we move toward
the ACA's year of implementation, the companies with the least to fear are the
ones that have taken the initiative, embracing the greater good of better
employee health.

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As
one of the major changes wrought by ACA, new public exchanges through which
health care can be purchased directly may be viewed by many executives as the
solution to the unending problem of rising health care costs: Why not just end
benefits sponsorship and send everyone to the public exchanges?

But
as we noted above, very few employers are likely to terminate employee medical
benefits. An emerging option, however, is to offer health insurance through
private exchanges providing access to range of health plans. The private
exchange landscape is growing quickly, as a number of players, including
Mercer, have introduced private marketplaces for both large and small firms
with as few as 100 employees.

It's
worth noting that the use of a private exchange can facilitate the transition
to a defined-contribution approach to providing benefits coverage. This
transition mirrors the defined-benefit-to-defined-contribution revolution in
retirement plans over the last 15 to 20 years. A DC approach shields the
employer from the open-ended costs of traditional arrangements and gives the
employer direct control over future cost increases.

While
moving to a DC approach may solve an employer's cost issues, if it simply
shifts increasing costs to employees, many will consider it sub-optimal.
Private exchanges will operate much like markets do in other sectors of the
economy. Since health plans and other benefit providers will be competing for
the consumer's business, the market forces of innovation and price competition
will be in play.

Many
employees are currently over-insured for health coverage. A private exchange
with compelling decision support and access to other benefit products that
enable employees to manage their risks will help drive adoption of medical
plans that will be less expensive and have a slower rate of cost increase.

Importantly,
the employer's role changes when it provides benefits through a private
exchange. Today, employers control most aspects of their benefits programs --
which benefits are made available, details of the plan design, which
carriers/vendors are offered, and so on. With a private exchange, employers
still will determine how much they will pay toward benefits and how to allocate
that money among their employees.

But
they will rely on the exchange sponsor to provide most or all benefits
management functions, including handling the compliance complexities of the
ACA. An end-to-end consumer experience -- ranging from employee education to
decision support tools, shopping and customer-service enhancements -- also will
be the responsibility of the exchange sponsor.

In
all, the five considerations we've discussed are major signposts for HR
executives and senior management as they navigate the thickets of the ACA on
the way to 2014. While a number of the law's technicalities remain to be
resolved, and changes are certain to complicate its implementation, these five
realities need to be faced now -- to help ensure cost-efficiency and employee
engagement as the healthcare-reform era continues to gain momentum.

Tracy
Watts is a partner in Mercer's Washington office and is Mercer's U.S. Leader
for Health Care Reform. Eric Grossman is a senior partner in Mercer's health
and benefits business, in Norwalk, Conn., and the business leader for the Mercer
Marketplace private exchange.